Improving liquidity will no longer promote economic growth

The recent international events have made it clear that foreign policy may cost dear. Unexpected increase in capital outflow caused by growth in political risks around Russia has given rise to the knock-on effect in the financial market and around.


Sliding capitalization of Russian companies on trading floors has necessitated unintended restructuring of equity-backed loans and changes to the lending policy in the mid-term perspective. A slump in the ruble exchange rate together with its higher volatility has necessitated the adjustment to the parameters of the national monetary, fiscal, and economic policy, changes to the structure of export-import operations and destabilized the banking system which has a significant effect on every national’s welfare in Russia, as credit resources play a critical role in the promotion of economic growth.


The recent history has shown that the Government and the Bank of Russia has sufficient quantity of instruments to be able to overcome and mitigate the effects of drastic capital outflow caused by both unstable situation in financial markets and military and political conflicts. The current situation resembles in many aspects the events which took place in the foreign exchange and stock markets, as well the banking system at the end of the recent decade. Furthermore, it’s important to note that the reasons for the global financial and economic recession are cyclic and associated with structural misbalances in the leading economies and debt-related issues faced by the developed countries.


The current situation in the Russian financial market in general and the banking system in particular is indicative of the Russian economy facing structural problems and results from growth in a set of political risks. Whereas the issue of making the Russian economy more competitive should be considered within the context of resolving structural and institutional objectives, the issue of managing the international political risk related to the accession of new regions to Russia, and analysis of its effect on financial stability should reasonably be analyzed on the basis of assessing the contribution of foreign capital to the national financial system.


As of January 1, 2014, Russian commercial banks owed to foreign creditors $215bn or about 12% of banks’ total liabilities, showing that the Russian banking system depends largely on foreign creditors. Corporate sector’s total indebtedness to foreign creditors as of the foregoing date amounted to $435bn or about 23% of GDP, which also can be considered low given a high level of indebtedness to companies controlled by Russian shareholders in tax heavens.


Therefore, potentially less available funding in international capital markets isn’t a serious exposure for the Russian financial system, because it can be compensated through resources available in the domestic interbank lending market, as well as instruments of the Central Bank’s monetary policy which should be improved in terms of enhancing transparence and consolidation of numerous instruments designed to manage liquidity.


Since Russia’s potential and actual output shows low values, it seems that monetary easing measures including the introduction of an instrument allowing banks to obtain long-term financing secured by investment projects may result in minimal and unstable economic growth in the long-term perspective amid higher inflation expectations and foreign exchange rate volatility.


Yuri Kondrashin, an expert of Gaidar Institute’s Center for Structural Research